May’s miserable home sales numbers did little to diminish CEO Stuart Miller’s optimistic outlook for Miami-based Lennar during its Thursday morning conference call.
Lennar posted a second-quarter profit of $0.21 per share, well beyond analysts’ expectations. Miller said the May sales slump, which occurred after the April 30 federal home buyer tax credit, was expected and was only a bump in the “rocky and sloppy” road to recovery.
“We knew all this time that void wouldn’t feel good, and it doesn’t,” Miller said. He added that he thinks the housing market is continuing to stabilize and is “generally in recovery.”
Lennar delivered 2,912 homes in its second fiscal quarter, which ended May 30, down 8% from 2009’s same quarter but up 45% from its first quarter this year. New orders of 3,207 were down 10% from last year and up 24% from the first quarter. Backlog, on the other hand, at 2,499 homes was up 21%.
Executives said June’s sales numbers are already improving. “As we are coming into June, we feel that demand is starting to make a modest recovery,” Miller said. “The sense from the field is that as we go forward, it’s really going to be low interest rates and affordable pricing of homes that is going to allow the free market to go forward and stabilize.”
Miller’s glass-is-half-full attitude was no doubt helped by the fact that the rest of the company’s stats for the quarter were stellar, considering the circumstances.
There’s the $39.7 million in earnings, for instance, which tidily beat the $116.5 million the company lost in the same quarter of 2009. Plus, the company’s gross margins on home sales were up 1.1% for the year, and its operating margin climbed 1.13%. And the SG&A expenses as a percentage of home sales improved by 40 basis points from the year before.
Profits from Lennar’s home building arm, its financial services department, and its distressed asset division dubbed Rialto Investments all combined to return the builder to profitability.
Rialto was formed by Lennar several years ago to buy and hold distressed assets for the builder. Last fall, it got its first infusion of land when it formed a public-private partnership with the Federal Deposit Insurance Corp. to buy and then manage $3 billion in distressed real estate loans.

Already that deal is turning a profit, bringing $5.1 million to Lennar’s books in the second quarter after expenses and sharing the proceeds with its partners. Rialto now has three offices in Miami, Atlanta, and New York with 70 employees.
In addition to bringing in management fees, Rialto is also intended to be a land pipeline for Lennar. Already, Rialto has “tied up” more than 700 home sites for Lennar, and the land the company acquires from Rialto is expected to net “outsized” returns.

Miller said the company continues to look for land deals to boost its community count, which ended the quarter at 416.
In response to an analyst’s question about tales of builders walking from land deals they made in the early rush, Miller suggested that some of that land will end up back on the market.
“There was a pretty good rush to buy land deals and tie them up,” said Miller. “There were some who went in and tied up whatever they could, and the pricing made you scratch your head.”
He suggested that some of those deals will “make noise” as they end up back on the market after builders walk away when they figure out they paid too much. “There are going to be some deals that get backed away from,” Miller predicted. “They just didn’t make sense from the outset.”
Rick Beckwitt, a Lennar executive vice president, offered detail on how some of Lennar’s markets have been performing: 

  • "Surprisingly, Florida is one of our strongest markets now,” he said, crediting some good early land deals for the success.

  • Texas is softer, especially in Dallas. San Antonio is the strongest of Lennar’s Texas markets.

  • North Carolina is a mixed bag, with Raleigh better than Charlotte.

  • The mid-Atlantic is good, helped by the federal government’s presence.

  • New Jersey is “decent," and

  • “California is very, very community-specific.”

Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines. 

Learn more about markets featured in this article: Miami, FL, Atlanta, GA.